What is a clearing house?
In one line: A clearing house stands between the buyer and seller of an exchange trade, guaranteeing that each side gets what they're owed if the other side fails.
A simple example
You buy one MES futures contract. Someone you'll never meet sells it. If price rises 10 points, you're owed $50 ($5 a point).
What if the seller can't pay? That's the clearing house's job. Once the trade is matched, the clearing house becomes the buyer to every seller and the seller to every buyer. You're owed money by the clearing house, not by a stranger.
For CME futures, that's CME Clearing. For US listed options, it's the Options Clearing Corporation (OCC). For US stocks, it's part of the DTCC.
How it protects itself
- Margin: each side posts money up front, called initial Margin.
- Daily settlement: futures are marked to market every day. Winners get paid, losers pay, before the next session.
- Default funds: members put money into a shared pool to cover a failure.
That's why exchange-traded futures carry far less Counterparty risk than a private deal between two people.
Why it matters
When you trade on an exchange, you don't have to trust the person on the other side. The system is built so trades get settled.
It also explains rules that can feel strict. A margin call in futures comes fast because the clearing house settles gains and losses every day.
A common mistake
Assuming every trade goes through a clearing house. Many retail forex and CFD trades are "over the counter". Your broker is often the other side of your trade. Then the broker's health matters, and so do the rules it's held to.
Check how your broker is regulated. In the US, forex dealers are overseen by the CFTC and NFA. See forex vs stocks and Futures contract.
Questions
What does a clearing house do in simple terms?
It makes sure both sides of a trade get what they're owed, by stepping in the middle and holding margin from both.
Can a clearing house fail?
It's very rare, because of margin, daily settlement and member funds. It isn't impossible, which is why regulators watch them closely.
Is a clearing house the same as an exchange?
No. The exchange matches buyers and sellers. The clearing house settles and guarantees the trades. Some firms, like CME Group, run both.
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